As a psychologist who works with money managers in financial markets, I witness the dynamics of relapse daily. While traders are well aware of the perils of violating their rules and acting impulsively on emotions, they find themselves repeating these very mistakes--often at considerable cost.

Why is it so difficult for us to change?

The Triggers For Relapse

Consider Don, a portfolio manager who has made consistent returns trading several strategies in global markets. His combination of trend trades based on market themes and pairs trades based upon the widening of spreads between related assets has helped him make money in a variety of market conditions. His prudence and sound risk management have prevented him from losing significant money when trades have not worked out.

The management of Don's firm has been pleased with his progress and has encouraged him to place larger trades and make greater use of his capital. With his high Sharpe ratio and natural caution, he could easily double his position sizes without getting near the loss limits set by the firm.

Accordingly, Don has set about gradually increasing his risk-taking, sizing up all of his positions by a small increment. Once he adjusts to the new level of risk without marring his performance, he plans to bump his position sizing further.

Strangely, however, Don finds himself unable to enact his plan. As soon as he takes losses on positions, he finds a reason to return to his original position sizing. Similarly, when markets become reactive to headlines, he pulls in his risk and returns to his old ways. Two months after laying his plans, he is no further along in his goals than when he started--in spite of making money the entire time!

Research suggests that relapse is a function of "high-risk" factors--situations that trigger old, unwanted behavior patterns. For an alcoholic, those high-risk factors could include feelings of loneliness and emptiness, physical sensations of craving, or feeling good in social company. For Don, triggers were ones that arouse his fears of loss. In relatively quiet markets and after he's made money, he is consistent in acting on his new risk-taking plans. Once markets become less certain and he absorbs losses, his anxiety triggers the return to old, safe behaviors.

While each person's triggers are different, there is a common ingredient in relapse: our return to those old patterns is state-dependent. In his normal calm, focused state, the alcoholic can sustain an intention to not drink and work the steps of his self-help program. Under conditions of emotional distress--or euphoric overconfidence!--the urgency of his perceived need for change wilts.

Similarly, with Don, making more money by taking greater advantage of his trading strengths is a priority as long as he's calmly focused on that goal. Once the fear of loss is front and center and flight or fight reactions kick in, the priority he has assigned to making his change melts away. In one state of mind, he is motivated for positive change. In another state, he loses that urgency altogether.

In a very important sense, when we relapse, we are "out of our minds." We no longer process information about ourselves and the world through longer-term, rational deliberation. Rather, we act on the feelings and needs of the moment. It is the instability of our cognitive, emotional, and physical states that sets us up for relapse. In one state, we sincerely devote ourselves to a New Year's resolution. In a different state, we let it slide.

When Willpower Loses Its Power

Kelly McGonigal makes the important point that our willpower--our degree of self-control in sustaining intentions--can be hijacked by temptation and stress. Relapse is a prime example of a willpower fail. We break that diet or violate that commitment to sobriety when we're tempted, when we're upset, and sometimes when we're feeling a bit too on top of things. That occurs, McGonigal points out, when we're on autopilot: unaware of what we're feeling and doing. Don, for instance, did not consciously deliberate a refusal to act upon his risk-taking plan. Rather, he quickly jettisoned the plan in the heat of the market moment.

Research on willpower suggests that it is a finite resource. When we direct ourselves toward goals with conscious effort, we eventually fatigue. Once that effort flags, we're much more likely to return to autopilot mode. Without self-awareness, McGonigal notes, there is little power to our will.

What we need to build self-awareness is the capacity to move from one conscious state to another. In other words, it is not simply the shift to fight-or-flight mode that is the problem for trader Don. All of us enter that mode at times and sometimes quick action to fight or flee is adaptive. Rather, Don's problem is that he loses self-awareness at the time he becomes stressed. It is not any particular state, but the inability to control his state shifts, that reduces Don's self-determination.

Imagine a person listening to a radio. Sometimes the radio plays good music, sometimes it doesn't. Sometimes the signal is strong and clear; other times it fades in and out with static. The listener is frustrated, resigned to an unreliable radio experience. Then someone comes along and points out that the radio has a dial. At any time, the person can move the dial and listen to something better. He can control his listening experience!

Consciousness is what we're aware of: it's our radio.

What we fail to see is the dial.

From Relapse To Prolapse

So how can we enhance our control over our conscious states? If we know willpower is a finite resource and we know that we are prone to relapse, we can prolapse: actively plan for moments of setback. There are two methods we can utilize to proactively deal with our tendency to relapse:

In short, we can proactively deal with the problem of relapse by cultivating mindfulness and training our brains to sustain desired states. Coaching, therapy, and self-help can be invaluable resources in initiating change processes, bringing us closer to our goals. By enhancing self-awareness focused attention, we make ourselves more able to sustain those changes until they eventually become new, favorable habit patterns. If there is a secret to self-improvement, it's sustaining change long enough so that it becomes routine and no longer depends upon fragile willpower!

I am Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. I work as a performance coach for hedge fund portfolio managers and traders and have written several books on trading psychology. I have also written ...